India Discoms keen on shorter power purchase pacts instead of 25-year contracts

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    They hope to benefit from e-auction and continuing slide in power prices

    Despite the Centre’s move to liberalise the modus operandi for supply of coal to power utilities in line with the Ujwal DISCOM Assurance Yojana (UDAY), there is a growing trend among distribution utilities to prefer short- or medium-term power purchase agreement (PPAs), instead of a 25-year-long term. According to information gathered from the power ministry and industry players, about 15,000 Mw of generation capacity is under short or medium-term PPAs, as cash-strapped distribution utilities push for shorter terms.

    Distribution utilities have also shown interest in the recently launched e-auctions for short-term power procurement, planning to cash in on the continuing slide in power rates, instead of going in for long-term PPAs at fixed cost.

    This apart, power sector players say certain conditions imposed by the UPA government in financial year 2012-13 to cope with the mismatch between coal production and demand; this has resulted in low offtake and led to huge underutilised and unutilised generating capacities — leading to a paucity of long-term PPAs. Those conditions, which are still in effect despite the hike in coal production and its availability, included restricting the quantum of coal supplied under fuel supply agreements (FSAs) at levels of 65 per cent, 65 per cent, 67 per cent and 75 per cent of the annual contract for the period between 2013 and 2017.; This made supply of coal under FSAcontingent upon the signing of long-term PPAs with the distribution companies.

    “’Keeping in view the tepid demand of power and stockpiling of coal at pitheads, the conditions imposed on usage of coal in 2013 in view of scarcity at that time, needs reconsideration,” said Ashok Khurana, director-general of the Association of Power Producers. “With the e-auction platform for short-term power purchases operational, which would ensure transparent and competitive price discovery in the short-term, there is no reason for not allowing linkage coal usage for short-, medium- and long-term, with a condition that procurement of power using such coal has to be through competitive bidding. This will help optimal power procurement by the utilities, some of whom are reluctant to be saddled with the fixed cost of long-term PPAs.”

    CRISIL Ratings estimates nearly 10,000 Mw of capacity in the country is without any long-term PPA, according to Senior Director Sudip Sural. These plants are subject to vagaries of merchant power prices and are entirely dependent on e-auction coal.

    “’With respect to making supply of coal contingent on signing of the long-term PPA, the government can consider allowance of plants with medium-term PPAs for coal linkages. This is because, given the precarious financial health of discoms, they are still wary of entering into long-term PPAs. The developers are currently getting impacted not so much by coal supplies but by their inability to sign up long-term PPAs with discoms.”

    On the removal of the restriction on the quantum of coal supply under FSA, Sural said it might not yield any incremental benefits in the next 12 months. “’The relevance of coal availability will therefore be limited until power demand improves driven by the positive impact of UDAY,” he said.

    UDAY provides for the financial turnaround and revival of distribution utilities and importantly also ensures a sustainable permanent solution to the problem.

    POWER PLAY

    Discoms reluctant to be saddled with the fixed cost of long term PPAs given their precarious financial health
    Constraints at the generator end have shifted from a coal deficit situation to one where long term PPAs are not being signed by discoms
    Industry bats for reconsideration of conditions imposed on coal usage in 2012-13 in view of the tepid demand of power and stock piling of coal at pitheads
    UDAY scheme to help turnaround of discoms and thereby increase offtake

    Source : BS